US finds it tough to take its own medicine

There’s something fitting about Timothy Geithner being on America’s financial fire brigade. First, here’s a memo that the US treasury team, of which the New York Federal Reserve president was a member, might have written a decade ago.

To: Asian Finance Officials

From: US treasury

Subject: Worsening Regional Crisis

As economies reel amid instability and as investors flee, it’s important that Asian policymakers heed this 10-point plan:

1. Raise interest rates to support currencies. 2. Cut government spending and debt. 3. Don’t blame speculators and hedge funds. 4. Let property prices slide. It’s a correction, not a crash. 5. Don’t save those who made bad decisions. Moral hazard is bad. 6. Increase transparency in the corporate sector. 7. Subsidies of any kind are always and everywhere bad. 8. Get banks to write down bad loans immediately. 9. Avoid blaming the media for your problems. 10. Follow the free-market policies that drive US prosperity.

Now for the message emanating from the US treasury these days: Disregard all of the above.

“The shifts in strategy are taking a lot of getting used to,” Marshall Mays, director of Emerging Alpha Advisors Ltd and a longtime Asia investor, told me in Manila last week.

Other financial shifts are looking nothing less than tectonic. Just ask Lee Chol Hwi, chief executive officer of Korea Asset Management Corp. Known as Kamco, the state-run outfit helped liquidate distressed assets in South Korea after the 1997 financial crisis. It’s now seeking to buy as much as $900 million (Rs4,086 crore) of bad loans in the US.

Plenty of US companies are lobbying for Korean money. Lehman Brothers Holdings Inc. seeking investment from state-owned Korea Development Bank is, but one example. “So much has changed in the world in the last 10 years,” Lee says. Those changes were the buzz last week at an Asian Development Bank (ADB) conference in Manila. The basic take was that the US is proving better at imposing its prescriptions on developing nations than following them.

One can debate the merits of how the US is handling its financial crisis. Is there still too much Milton Friedman in how the treasury and Fed are acting? Is a bit too much Karl Marx seeping into the mix? Or are the Marx Brothers in charge? Some investors in Asia and economist Nouriel Roubini joke about how the US is morphing into the USSA: the United Socialist States of America.

There’s some hyperbole here. No one wants to be remembered as the Nero of the US, fiddling as Wall Street burns. An expert on the Great Depression, Fed chairman Ben Bernanke is taking no chances. Neither is Geithner, who saw first-hand how Asian growth stars such as Indonesia, Korea and Thailand were flattened by denial in the halls of power.

Recent events are disorientating for Asia, a region long told that the free-market gospel preached by the US was the ticket to prosperity. “Since the Asian crisis, we have learned it takes lots of money and trial and error to stabilize things,” says Nicholas Kwan, head of Asian research at Standard Chartered Plc. in Hong Kong. “The US is just beginning this process.” What’s the model for Asia now? Europe? Is it China’s mix of top-down control of economic trends and market openness? Is it a return to Japanese-style financial management?

These aren’t just academic questions for a region that is home to many of the world’s fastest growing economies. One of Asia’s biggest problems is that political development hasn’t kept pace with the opening of markets. From instability-prone Thailand to control-freak China to politically-paralysed Japan and malaise-plagued Malaysia, Asia is littered with governments struggling to grow faster. As the US heads back to the drawing board to restore trust in markets, Asia will need to think more for itself than it has in recent decades.

How far the US’ credibility has fallen can best be seen in the wealth dynamics of Washington and Asian capitals. While savings-rich Asia is setting up sovereign wealth funds to prepare for the future, the US is setting up debt funds to repair the past. The US has spent the 2000s fighting Al Qaeda, while China built world-class cities and airports.

Ideas are flying in Washington. US senate banking committee chairman Christopher Dodd says the Fed can act as an “effective Resolution Trust Fund” to buy and dispose off bad debt stemming from the subprime mortgage crisis. Financial regulators, attorneys general in New York, Texas and Connecticut, and the three largest US pension funds are cracking down on short-sellers after the collapse of Lehman and American International Group Inc.

US officials would have been aghast if Asians did that a decade ago. It’s a reminder that in times of crisis, it can be hard to take your own medicine.